The Government's push to merge the Central Bank and Financial Regulator is set to move a step closer next month as it takes delivery of a draft of complex legislation on a new watchdog regime.

Legislation giving rise to the National Asset Management Agency allows for a stop-gap measure of combining the two bodies under a single board, although the Finance Minister Brian Lenihan has still to streamline the size of the combined boards.

Government sources said it was possible a draft summary of the legislation would be ready next month, although it could take until March.

It is understood staff at the Attorney General's office have upped their engagement with the Department of Finance on the legislation in recent weeks.

Senior Central Bank executives are also part of an implementation group, chaired by the department, overseeing the reform of the regulatory regime.

The European Central Bank (ECB), which will be a key supervisory player under European Commission plans to overhaul the watchdog system across the EU, is being kept up to speed with progress.

Brussels' plans to set up two pan-European financial authorities envisage the establishment of a systemic risk council, chaired by the ECB, and a second authority to thrash out standards to be applied to the day-to-day supervision of institutions.

Authority

It has been seven months since the Government announced plans to merge both supervisory functions under the one roof, under the name of the Central Banking Authority.

The spin-off of the Financial Regulator from the functions of the Central Bank in 2003, with a 'light touch' mandate, was widely viewed to have contributed to the property bubble and the financial crisis.

The Central Bank issued numerous warnings in various reports about how the property boom was unsustainable and that the country's open economy was vulnerable to a serious international shock. However, critics point out that neither the Financial Regulator nor the Government acted on the alerts.

Professor Patrick Honohan was appointed the new governor of the Central Bank last autumn, while the new head of financial supervision, Matthew Elderfield, took up his position earlier this month.

The watchdog hired 35 new hands-on supervisors last year to oversee risk management in both domestic and foreign-owned financial institutions in the country, in addition to a drive to shore up its top team.

It is also looking to set up a panel of external risk advisers to support the Central Bank in assessing governance and risk management standards.

David Went, chairman of the financial regulator's consultative industry panel, has suggested there should be a two-track approach to regulating retail banks, which were of systemic importance, and international wholesale institutions in the IFSC.

He said Ireland needed to avoid a "one-size-fits-all" approach to regulating the sector. This does not mean that international institutions should be subject to more lax supervision, he said, especially if the Government was intent on growing the IFSC.